Over the past decade, Americans have enjoyed an extended period of low mortgage rates. Interest rates of 4% and below was the norm for a long time, but that is finally changing.

The average rate for a 30-year FRM jumped six basis points in the second week of May. This latest surge is part of a series of mortgage rate hikes in the past few months. Since January, rates have increased about 50 basis points. Experts expect rates to reach upwards of 5% by the end of the year.

Key Takeaways

Mortgage interest rates have increased by about 50 basis points since January 2018

A one percentage point increase in rates can result in about 7% to 8% fewer home sales

Mortgage rates will approach 5% by the end of the year, discouraging homeowners from trading up

Excerpt

Mortgage rates this week jumped to their highest level since 2011, signaling a shift from a period of ultracheap loans to a higher-rate environment that could slow home price appreciation and squeeze first-time buyers.

The average rate for a 30-year fixed-rate mortgage rose to 4.61% this week from 4.55% last week, according to data released Thursday by mortgage-finance giant Freddie Mac.

The jump this year reflects an abrupt departure from a long period of declining rates that began during the financial crisis. Rates bottomed out in late 2012 at 3.31% and clocked in at 3.99% as recently as January.

The spike this year has been faster than many economists predicted as a surging economy, the prospect of wage gains and a steep rise in prices for commodities such as lumber and gasoline stoke inflation worries.

“There’s been a regime shift in the way the market is thinking about rates. We’ve been waiting for the period [of higher rates] for a while and now it’s finally happening,” said Sam Khater, chief economist at Freddie Mac.

The concern among economists is that higher rates will prompt homeowners to keep their low-rate mortgages rather than trade up for better properties. As rates approach 5%, the risk of the phenomenon known as rate lock grows, economists said.

A one percentage point increase in rates can lead to a reduction in home sales of 7% to 8%, according to Lawrence Yun, chief economist at the National Association of Realtors. The recent increases in home prices and mortgage rates could especially hurt first-time and moderate-income borrowers, economists said.

The yield on the 10-year Treasury note, which tends to influence the 30-year mortgage rate, has been rising even more steeply recently. The yield on the 10-year Treasury note edged above 3.1% this week, its highest close since 2011.

What’s more, the Federal Reserve has signaled it will raise short-term rates three to four times this year and potentially three times next year.